The UK will fall into recession in 2019 if MPs reject Theresa May’s Brexit deal and the nation crashes out of the EU, says Schroders.

The asset manager says the risk of a no-deal Brexit should mean May gets her deal through parliament, a scenario it sees as 70 per cent likely, leading to a predicted 9 per cent increase in the dollar value of sterling.

Schroders places a 30 per cent likelihood on parliament rejecting the deal outright, leading to either a general election, a three-way referendum or a no-deal Brexit. It sees hard Brexit as the most likely of these three outcomes, predicting a 13 per cent decline in the value of the pound to $1.12.

Schroders senior European economist Azad Zangana says: “Overall, the deal is largely as we expected. As a reminder, this is only the end of the beginning. The future relationship beyond Brexit, and beyond the transition period has yet to be decided. The EU has always insisted that negotiations on trade and security amongst many other issues would not start until after Brexit has been completed. Trade negotiations are likely to take many years, possibly beyond the end of the transition period. Uncertainty for companies will therefore remain, prompting more to consider shifting investment plans away from the UK. The relief in the near-term will be that an agreement in principle reduces the chances of a no-deal or cliff-edge Brexit.

“The deal has been met by anger and accusations of betrayal of the original Brexit referendum result. Of course, nobody can claim with any authority that they know what form of Brexit people voted for, because that question was not on the ballot. After the details of the agreement were revealed, Theresa May announced that she had the full backing of her cabinet. The next day, several senior and junior ministers resigned in protest.

“At present, there are suggestions that the prime minister may face a leadership challenge from her own party. We believe that there are enough unhappy Conservative party members of parliament that would trigger a vote of no confidence. However, we doubt they have a majority in the parliamentary party, and so Theresa May is likely to survive.

“Looking ahead, the UK and EU are due to finalise the agreement on 25 November at a special summit. The Withdrawal Agreement would then be debated in the House of Commons for about a week, before an expected vote around 10 December. This is the next major risk to an orderly Brexit.

“The same significant number of hard-core Conservative party Brexiteers that are seeking to challenge the leadership of May are also threatening to vote against the deal in Parliament, preferring no deal at all. The DUP has stated that it will vote against the deal too as mentioned earlier, while the Scottish National Party (SNP) and the Liberal Democrats have also said they would not back the deal in the hope of avoiding Brexit altogether.

“Meanwhile, the main opposition Labour party have also stated that they would not back the deal, and instead, have called for a general election. They believe that they have the ability to achieve a “better” deal for the UK, but without outlining how such a deal would be achieved.

“Indeed, this is the problem at the heart of UK politics. The belief that the UK has much negotiating power is misguided, when in reality, the EU has dictated the terms of Brexit from the beginning.

“While politicians widely state that there is no majority to support May’s deal, they also state that there is no majority for a no-deal Brexit. Yet, in the absence of a deal being ratified, or a delay to Brexit being requested and backed unanimously by other EU states, the UK will be leaving the EU on 29 March 2019 without a deal or transition period.

“We believe that the risk of a no-deal Brexit will focus minds and lead to cross-party support for May’s deal. There are many Labour MPs that take a more pro-Europe centrists approach, which we believe would defy their hard-left leadership in order to avoid a chaotic Brexit. Passing the legislation would complete the path to the transition period, which according to our previous poll of currency experts, could take the pound up to 1.40 against the US dollar (9% appreciation).[1]We place a 70% probability on this outcome.

“If parliament does however reject the deal outright (30% probability), then a number of scenarios are possible:

A general election could be called

A three-way referendum could be called which would include an option to remain in the EU

The government continues, but starts to prepare for a no-deal Brexit.

“We doubt the first two options would yield a materially different outcome from the previous referendum and general election, and so our central view would shift to a no-deal Brexit. This would trigger a sell-off in sterling, which according to our poll mentioned earlier, could take the pound down to around 1.12 against the US dollar (13% decline).

“The path ahead is politically fraught, and sterling is likely to remain very volatile in the days ahead. The UK’s immediate outlook depends on the Prime Minister being able to sell her deal to parliament and the public.

“Failure to do this risks a no-deal Brexit, and a UK recession next year.”